Sunday, 26 March 2017

Here we have another
characteristically dodgy article from Duncan Weldon in The Guardian, who
foolishly believes that the way to sort out the public sector crises of
unaffordability is to throw more and more money at them (I argued here that that is the precise opposite of what we
need). Like giving more chips and ice cream to a morbidly obese child, pouring
more money into crisis-ridden services is only going to conceal the deeper
rooted problems, and will consequently make things worse in the end. This is a
point that has been made on here repeatedly in recent times.

What I haven't mentioned
quite so recently is the other big problem seen throughout articles like the
one above - a misunderstanding of who tax actually affects and in what way.
Take, for example, the call for higher corporation tax on the basis that by
taxing big corporations more there will be more to redistribute to struggling
families. It's a simple idea, but like many simple ideas, it is simply wrong.

The main problem is that
the definition is factually inaccurate, because corporations don't actually pay
tax - only individuals pay tax. The cost of corporation tax is primarily borne
by customers (with increased prices of goods or services) or employees (with
decreased wages) to avoid being borne by shareholders (through lower
dividends). Corporations pay tax only in the sense that the cheque or debit is
written in the name of the company. If the cost of taxes ultimately falls on
individuals in the form of higher prices of consumption and lower wages (or in
some cases increased unemployment) then a tax policy that tries to hurt
corporations is simply a tax policy that harms the people the lefties are
trying to help.

Abolishing corporation
tax and taxing at the level of shareholder dividends and high-end consumption
at an increased rate, coupled with a reduction in the top rate of income tax,
would do more to boost the UK
economy than any of the flimsy policies most MPs proffer. But because the
abolition of corporation tax and top rate reductions are about as attractive as
a fart in a space suit to most of the electorate, no political party is brave
enough to implement them.

Another thing not often
realised is that the cost of tax to an individual is greater than the sum of money
paid to the IRS in 1s and 0s. To see why, suppose that the demand for highly
skilled workers like doctors, surgeons, IT directors and financial advisers is
very inelastic. If taxes on high skilled jobs are high, it will reduce numbers
of doctors, surgeons, IT directors and financial advisers, which will mean that
consumers pay the price through higher fees for those services.

Where the demand is
inelastic, high taxes on such workers reduce the number of suitable people
willing to train for those jobs, with the result being that customers in need
of their services bid up their wages at a cost to their own pocket. In other
words, the cost of the tax is a transfer from those that pay the tax to those
that consume the services of those in the high skilled industry.

A similar issue arises
with the minimum wage, where the state-enforced increased cost to employers is
a cost that is passed on to consumers with higher prices or fewer jobs.
Further, PAYE taxes (that's income tax and national insurance) are a tax on
labour, which of course means that you get less than the optimum amount of it. Whether
PAYE taxes are paid by the employer (before he pays wages) or by the employee
(when he receives wages) doesn't matter much - they are essentially the same
tax on labour.

The place where the
ultimate burden of tax falls is largely contingent on supply and demand's
elasticity. If the supply of labour is elastic then that means prospective
employees won't be particularly sensitive to wage levels, thereby placing the
burden on employees. If on the other hand employers have to increase wages to
hire good workers then the tax burden falls on the consumers of what those
workers produce.

Income taxes interfere
in the market of trade by diminishing value in society too. This happens
because income tax means there are fewer transactions, as exchanges that would
otherwise benefit both parties now do not take place. Suppose I am willing to
pay no more than £11 per hour to have some work done, and I have some workmen
who are willing to do the work for £10 per hour. That being the case the
transaction should take place and both buyer and seller will be happy with a
£10 an hour hourly rate.

But once the government
imposes 20% income tax, things change, because now the most the workmen can
earn from me in net pay is £8 per hour, which means they'd be unwilling to do
the job for me. In order to satisfy the workmen's earning needs, the 20% income
tax means that the workmen have to charge me £12.50 an hour to clear £10 an
hour. What then transpires is that either the work doesn't get done because I'd
rather not spend that much money, or else I end up doing it myself and making a
much less good job of it.

The upshot of
all this is that tax is not some kind of magic money tree that can be obtained
without negative consequences. People who wish to tax us out of crises usually
miss three vitally important things:

1) Tax
something and you usually get less of that thing, which in many cases means the
nation is worse off by the reduction.

2) Tax
something to bestow benefits to one group of people and you usually find that
what you give to them in one hand you take it out of their other hand a short
time after.

3) Tax
something and you also end up hurting other groups you have usually totally
forgotten about.

About Me

This is the Blog of James Knight - a keen philosophical commentator on many subjects.
My primary areas of interest are: philosophy, economics, politics, mathematics, physics, biology, chemistry, theology, psychology, history, the arts and social commentary.
I also contribute articles to the Adam Smith Institute and the Institute of Economics Affairs.
Hope you enjoy this blog! Always happy to hear from old friends and new!
Email:j.knight423@btinternet.com